Investing, Asset Allocation, Economics & the Search for the Bottom Line

RANKING, SORTING, SLICING & DICING EQUITIES, BUT ULTIMATELY GUESSING

For all the tension in the world, stock markets around the globe have shown no trouble climbing. Call it well-founded optimism or a blatant disregard for risk, but whatever the correct the label it’s clear that 2006 is proving to be a good year for equities. Whether the trend continues remains to be seen, but it’s hard to argue with the results so far. Indeed, it’s only March and many investors are sitting on tidy gains already.
The 29 regional/world benchmarks in the S&P/Citigroup Global Equity Indices series, for example, all show increases this year through March 13. That’s on top of robust advances last year. Although there’s a fair amount variation in the total returns, depending on the market, it’s been hard to lose money by spreading assets around the world.
The best performer this year in dollar-based terms through March 13 among the regional/world indices from S&P/Citigroup is European Emerging, soaring 17.32% on a total return basis so far. The bottom performer is Asia Pacific, although it’s still in the black year-to-date by 1.64%.
There may be room to run further in global equity markets, to judge by some of the more optimistic commentators of late. Indeed, the fear of the moment in the bond market is that economic growth may be stronger than the fixed-income set expected–news that, in contrast, tends to inspire buying among equity investors.
Nonetheless, with everything bubbling in stocks in broad terms, now seems like an opportune moment to find out which corners of the globe look pricey, and which ones are in the running for offering a bit more value. As always, that’s a tricky call, and subject to a wide variety of misleading conclusions. Indeed, there’s no sure-fire method for deciding if stocks are priced to run, crash or tread water. What’s more, the immediate future is vulnerable to so-called exogenous threats, which is to say that something out of left field that no one expected, and that has no relevance in financial analysis, could throw a wrench in the machine.

But the lack of definitive measures and clarity about the future doesn’t mean we must remain completely ignorant of valuations. In the long run, valuation matters, or so the academics tell us. With that in mind, we sorted the 29 regional/world benchmarks from S&P/Citigroup listed in the chart above, ranking each on five metrics: dividend yield, price-to-book ratio, 12-month trailing price-to-earnings ratio, return on equity, and price-to-cash flow. Here’s a summary of the results:Dividend Yield–Asia Pacific excluding Japan looks most attractive by this gauge, carrying a yield of 3.34%, or more than 100 basis points above the average yield of 2.31% for the 28 regional/global indices. The lowest-yielding benchmark was emerging markets at 1.45%. The World index is 2.04%.Price-to-Book Ratio–The lowest P/B is Asia Emerging + Hong Kong + Singapore at 2.02, well under the average of 2.53 for the 28 regional/global benchmarks. Mid-east and Africa had the highest P/B at 3.24. The World index P/B is 2.67.12-month Trailing Price-to-Earnings Ratio–Latin America posted the lowest P/E of 12.99, while Asia Pacific had the highest at 21.15. The average for the 28 indices is 16.64. The World index P/E is 18.65.Return on Equity–Latin America also looks most attractive on this measure, boasting the highest ROE, weighing in at 19, handily above the average of 15.07 among the 28 benchmarks. The lowest ROE designation goes to Asia Pacific at 10.07. The World index ROE is 14.66.Price-to-Cash flow Ratio–EMU Countries and Eurozone are tied for the lowest PCF ratio, although at 7.06 the lowest is only slightly below the average of 8.68 for the 28 benchmarks. The highest PCF ratio goes to North America at 10.97. The World PCF ratio is 9.71.